Morgan Stanley’s ETF move a 'giant step' for bitcoin adoption

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

The significance of Morgan Stanley’s move to let its advisers pitch bitcoin ETFs to certain clients.
A crypto-focused super PAC with a track record unveils backing for 18 House candidates.
A look at the VIX one week into August — a month known for poor stock performance.

There has been no shortage of crypto ETF milestones this year. During a week so far marred by market volatility, another potential ETF-related catalyst has emerged.

Spot ether ETFs hit the US market last month, and firms have even filed for funds that would hold solana. But before all that, the January launch of US spot bitcoin ETFs captured the attention of crypto and finance folks alike.

And remember BlackRock’s iShares Bitcoin Trust (IBIT) went on a 71-day inflow streak? That was an absurdly unprecedented run for any new ETF.

Now, Morgan Stanley financial advisers are able to offer IBIT, as well as the Fidelity Wise Origin Bitcoin Fund (FBTC), to certain clients, CNBC previously reported. That starts today.

A Morgan Stanley spokesperson confirmed CNBC’s report, but declined to comment further.

This soliciting is different from what these advisers did before (and those at competitors continue to do): allowing investments into such products only if clients actively sought them out.

So why is this change a big deal? Well, financial advisers manage a lot of money. Like a lot, a lot. Several dozen trillion, a lot.

Driven by retail investor interest (and some institutional buying), the US spot bitcoin ETFs have notched $17.2 billion of net inflows in nearly seven months of trading.

Segment observers expected it would take longer for big wealth manager players (aka wirehouses) to get involved, given due diligence hurdles.

But now, there’s movement on that front.

A Wall Street powerhouse starting to advise wealthy clients on these products represents a next “giant step” of bitcoin adoption, said ZX Squared Capital co-founder CK Zheng.

“This educational process could be lengthy, but could be extremely impactful to truly make the digital asset class a part of a long-term investment portfolio instead of a short-term trading or speculation,” Zheng told Blockworks. “This is the only way to systemically make bitcoin as a part of a well-diversified portfolio possible.”

Bloomberg Intelligence analyst Eric Balchunas framed Morgan Stanley’s move in a different way during a Wednesday webinar. It’s like getting Whole Foods to carry your new organic salad dressing, he explained.

“Otherwise, you have to go out there and guerilla-style sell your stuff,” he said. “This kind of puts it on a shelf for a bunch of people.”

As CNBC noted, Morgan Stanley’s 15,000 or so advisers will only be able to pitch the bitcoin ETFs to clients with a net worth of $1.5 million and a more aggressive risk appetite. These investments are for taxable brokerage accounts, not retirement accounts.

Bloomberg Intelligence’s James Seyffart noted not all advisers are going to be encouraging clients to allocate to BTC funds. For those who do, they are likely to be “small positions” in the 2% to 3% range, he added.

That said, industry watchers expect other wirehouses — like UBS, Bank of America Merrill Lynch, Wells Fargo, etc. — to follow suit at some point.

Edelman Financial Services founder Ric Edelman said in January he foresees financial advisers allocating more than $150 billion into spot bitcoin ETFs in the next two years.

US advisers tend to be the biggest buyers of ETFs more generally, 21Shares US business head Federico Brokate told Blockworks — a norm he expects to play out in the crypto segment too.

The near-term impact of this Morgan Stanley move on bitcoin ETF inflows is hard to discern. The US BTC funds have watched about $550 million in assets exit their coffers over the last three trading days.

While the latest “face-ripping selloff” might cause pause for eligible Morgan Stanley clients to allocate to BTC right away, Balchunas said, it’s hard to bet against the BlackRock- and Fidelity-backed asset class longer-term.

Given the biggest financial companies are scrupulous in assessing and capturing demand, that seems like a more-than-fair take.

— Ben Strack

$1.9 billion

The amount of inflows crypto exchange Binance has clocked over the past seven days. The vast majority of that came within a 24-hour period between Monday and Tuesday, according to data from DeFiLlama.

Binance CEO Richard Teng said the net inflow of $1.2 billion in 24 hours “marks one of the highest trading volumes on Binance year-to-date.”

The high-volume day came as crypto markets continue to experience heightened volatility amid a large-scale selloff in equities. Bitcoin was trading 1.6% lower (over 24 hours) at 2 pm ET Wednesday, putting the largest crypto asset down 16% from a week ago.

Ether similarly was trending 5% lower at 2 pm ET and has dropped 28% in the past seven days, according to data from Coinbase.

More backing for pro-crypto lawmakers

Crypto-focused super PAC Fairshake is getting its TV advertising time in order ahead of November.

The group said Wednesday it has begun reserving its “first tranche” of ads — worth $25 million — in support of 18 candidates vying for seats in the US House of Representatives.

Fairshake is throwing its financial weight behind nine Democrats and nine Republicans, noting in a statement that it sees a “broad bipartisan consensus” behind crypto and blockchain as a key part of the future economy.

“We will continue to deploy our resources in support of leaders on both sides of the aisle and in both houses who are committed to getting things done and working with the industry to pass responsible regulation that drives innovation, creates jobs and sustains America’s global leadership,” the super PAC added in an email.

The support covers candidates across 13 states, including four California GOP members (David Valadao, Mike Garcia, Michelle Steel and Young Kim), two New York Democrats (Pat Ryan and Tom Suozzi) and a pair of Dems from Illinois (Nikki Budzinski and Eric Sorensen).

All voted for the Financial Innovation and Technology for the 21st Century (FIT21) Act, according to Stand With Crypto. The House passed that bill with bipartisan support in May.

The latest ad spend update comes after Rep. Cori Bush, D-Mo., lost her primary to Wesley Bell on Tuesday. Fairshake spent about $1.4 million to oppose Bush, whom the group called “the latest anti-crypto, Elizabeth Warren-endorsed lawmaker to lose their seat in Congress.”

Fairshake also put roughly $2 million toward campaigning against Rep. Jamaal Bowman, D-N.Y., who lost his primary in June to Westchester County Executive George Latimer. The bulk of the super PAC’s financial support — about $10 million — went toward opposing California Democrat Katie Porter, who lost in a March primary to Rep. Adam Schiff.

Despite Fairshake’s spending on these races, it’s worth noting that Bush and Bowman saw even heavier financial opposition from the American Israel Public Affairs Committee (AIPAC).

— Ben Strack

The 411 on the VIX

At the end of July, we wrote about how equities typically don’t fare super well in August. We’re now seven days into the month, so let’s take stock.

August is usually not pretty, with the S&P 500 and Nasdaq Composite indexes in August 2023 losing 1.6% and 2.1%, respectively. But the start of this month has been especially tumultuous.

Midway through Wednesday’s session, the S&P 500 was down 3.4% since Aug. 1. The Nasdaq Composite had lost 4.5%.

The VIX surged to 55 on Monday, a high not seen since March 2020. Although it eased to about 26 on Wednesday after hitting 38.6 on Tuesday, the volatility index remains more than 60% over the past five trading days.

We’re not out of the woods yet, though. DataTrek Research co-founder Nicholas Colas says the VIX is headed into 35+ territory before the end of the month. The VIX almost never spikes just once in a given month.

A VIX of 35.3 is two standard deviations above the long-run average, so that’s the level to watch, Colas said. In past periods of volatility we have seen the VIX top 35.3 a lot. Between 2020 and 2021, it happened 50 times. Between 2008 and 2010, it happened 157 times.

The VIX has only entered the 20s a handful of times so far this year — all of which happened this month. Remember that volatility tends to be a leading indicator. So it could be weeks before we see these figures reflected in stocks, which seem to be cautiously continuing their rebound.

— Casey Wagner

Bulletin Board

The SEC this week addressed a federal court for the first time since the Supreme Court’s Chevron decision, asserting that the agency will still have the power to enforce its new climate and emissions reporting requirements.
The Crypto Market Integrity Coalition on Wednesday penned a letter to President Biden and Vice President Harris, demanding for more cooperation between the administration and Congress to create a regulatory framework for digital assets. The coalition comprises 50 member organizations, including Circle and Coinbase.
A new study from the NY Federal Reserve found the US government’s 2022 sanctions against crypto mixing service Tornado Cash were somewhat effective — but that cooperation was ultimately “mixed.”

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